First Potomac Realty Trust (FPO) 8-K Third Quarter 2003 Supplemental Financial Report

Third Quarter 2003 Supplemental Financial Report

Matters other than historical facts set forth within this Supplemental Financial Report are forward-looking statements within the meaning of the federal securities laws. You should exercise caution in interpreting and relying on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which could materially affect actual results, performance or achievements. These factors include, without limitation, the ability to enter into new leases or renew leases on favorable terms, the financial condition of tenants, the uncertainties of acquisition activity, the cost and availability of financing, the effects of general and local economic and market conditions, regulatory changes and other risks and uncertainties detailed in the prospectus included in the Company’s Form S-11 Registration Statement. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Index To Supplemental Information
September 30, 2003

	Page
Company Information		1
Results and Basis of Presentation Discussion		2
Statements of Operations		3
Pro Forma Financial Measures		4
First Potomac Predecessor Balance Sheets		5
Pro Forma Condensed Consolidated Balance Sheets		6
Selected Operating Ratios		7
Total Market Capitalization		8
Description of Properties		9
Portfolio Analysis		10
Summary of Largest Tenants		11
Lease Expirations		12
Debt Analysis		13
Management Statements		14

Quarterly Supplemental Disclosure
September 30, 2003

Company Information

First Potomac Realty Trust is a self-managed, self-administered real estate investment trust formed to acquire, operate and develop industrial and flex properties in the southern Mid-Atlantic region. Our focus is acquiring properties that can benefit from our intensive property management and seeking to reposition these properties to increase their profitability and value. Since its formation in 1997, First Potomac has assembled a 14-property portfolio consisting of 34 buildings totaling approximately 2.5 million square feet.

Corporate Headquarters	7200 Wisconsin Ave. Suite 310 Bethesda, MD 20814	Investor Relations	Barry H. Bass Chief Financial Officer (301) 986-9200 bbass@first-potomac.com
New York Stock Exchange	Symbol FPO	Web Site	www.first-potomac.com

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Quarterly Supplemental Disclosure
September 30, 2003

Company Background

First Potomac Realty Trust (“the Company”) completed its initial public offering on October 23, 2003. The Company sold 7,500,000 common shares of beneficial interest, raising net proceeds of approximately $102.1 million. The Company will raise an additional $15.6 million in net proceeds from the sale of an additional 1,125,000 common shares to cover over-allotments in a transaction that is scheduled to close on November 21, 2003. To date the Company has used approximately $55 million of the proceeds to repay outstanding debt, to acquire joint venture interests held by an institutional partner in four of the Company’s properties and to acquire Virginia Center, a 119,672 square foot flex property in Glen Allen, Virginia, a suburb of Richmond. The Company intends to use the remaining proceeds for general corporate and working capital purposes, including possible future acquisitions.

Results and Basis of Presentation

The results and financial information presented in this earnings release for the Company’s pre-IPO predecessor (“First Potomac Predecessor”) are presented on a combined historical and pro forma basis. The pro forma presentation reflects the effects of the IPO and the subsequent use of the IPO proceeds.

The unaudited Condensed Combined Statement of Operations and the Condensed Consolidated Balance Sheet of First Potomac Predecessor have been derived from the activities and results of the entities comprising our historical operations. The historical operations include the activities of First Potomac Realty Investment Limited Partnership (our operating partnership), First Potomac Realty Investment Trust, Inc. (the predecessor general partner of our operating partnership) and First Potomac Management, Inc.

The Pro Forma Condensed Consolidated Statements of Operations and Pro Forma Condensed Consolidated Balance Sheets for the nine months ended September 30, 2003 are based on the Combined Historical Statements of Operations and Combined Historical Balance Sheet of First Potomac Predecessor, adjusted for completed and probable acquisitions and to reflect the initial public offering completed on October 23, 2003. The Pro Forma Condensed Statement of Operations for the nine months ended September 30, 2003 assumes all of the following occurred on January 1, 2003, and the Pro Forma Condensed Consolidated Balance Sheet assumes all of the following occurred on September 30, 2003:

1)	Initial public offering of 7.5 million common shares at $15.00 per share, with net proceeds of $102.1 million;
2)	Issuance of 1.125 million common shares at $15.00 per share to cover over-allotments, with net proceeds of $15.6 million;
3)	Acquisition of capital interests in FPM Management LLC;
4)	Exchanges of ownership interests in various entities that owned interests in several properties;
5)	Repayment of approximately $63.6 million in debt, accrued interest and prepayment fees; and
6)	Acquisitions of Virginia Center and Interstate Plaza.

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Quarterly Supplemental Disclosure
September 30, 2003

	STATEMENTS OF OPERATIONS
	(in thousands)
	(unaudited)
				PRO FORMA
	FIRST POTOMAC			CONDENSED
	PREDECESSOR			CONSOLIDATED
	Year-to-date			Year-to-date
	9 months ended			9 months ended
	September 30, 2003			September 30, 2003
OPERATING REVENUES
Rental revenues	$	10,582		$	16,072
Tenant reimbursments		2,185			2,829
		12,767			18,901
PROPERTY EXPENSES
Property operating		2,129			3,226
Real estate taxes and insurance		1,041			1,530
NET OPERATING INCOME		9,597			14,145
OTHER INCOME (EXPENSE)
General and administrative		(1,549	)		(2,139	)
Other income		37			69
EBITDA		8,085			12,075
Depreciation and amortization		(3,385	)		(6,678	)
Interest expense		(8,660	)		(4,966	)
Equity in earnings of investees		(64	)		—
Income before minority interest		(4,024	)		431
Minority interest		206			(60	)
NET INCOME (LOSS)	$	(3,818	)	$	371

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Quarterly Supplemental Disclosure
September 30, 2003

				PRO FORMA FINANCIAL MEASURES (in thousands, except per share data)
				CURRENT
				YEAR-TO-DATE
				9 months ended
FUNDS FROM OPERATIONS (“FFO”)				September 30, 2003
Net income				$	371
Add back:
Depreciation of real estate and amortization of leasing costs					6,678
Minority interest					60
			FFO		7,109
ADJUSTED FUNDS FROM OPERATIONS (“AFFO”)
FFO				$	7,109
Straight-line rent, net					(134	)
Non real-estate depreciation					—
Amortization of finance costs					789
Tenant improvements					(530	)
Leasing commissions					(197	)
Capital expenditures					(440	)
		AFFO		$	6,597
FUNDS AVAILABLE FOR DISTRIBUTION (“FAD”)
AFFO				$	6,597
Scheduled principal repayments					(729	)
			FAD	$	5,868
	Total weighted average shares and OP units
Basic					10,030,523
Diluted					10,030,523
	FFO per share:
FFO per share — Basic				$	0.71
FFO per share — Diluted				$	0.71
AFFO per share — Basic				$	0.66
AFFO per share — Diluted				$	0.66
FAD per share — Basic				$	0.58
FAD per share — Diluted				$	0.58

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Quarterly Supplemental Disclosure
September 30, 2003

	FIRST POTOMAC PREDECESSOR
	CONDENSED CONSOLIDATED BALANCE SHEETS
	(in thousands)
	(unaudited)
	September 30, 2003			December 31, 2002
Assets:
Rental property, net	$	104,813		$	104,636
Cash		1,844			670
Escrows & reserves		1,740			3,313
Accounts & other receivables		1,025			303
Unbilled rent receivable		1,650			1,475
Deferred costs, net		3,550			3,395
Prepaid expenses & other assets		1,223			140
Intangible assets, net		1,747			1,436
Tenant security deposits		549			552
Investment in real estate entities		7,879			10,672
Total assets:	$	126,020		$	126,592
Liabilities:
Accounts payable & accrued expenses	$	2,770		$	391
Accrued interest		3,209			2,382
Rents received in advance		446			790
Mortgage loans & other debt		122,089			123,938
Total liabilities:		128,514			127,501
Minority interest		210			416
Shareholders’ deficit:
Common shares, $0.001 par value, 100,000,000 common shares authorized:
2,000 shares issued & outstanding		—			—
Additional paid-in capital		254			2
Deficit		(4,618	)		(3,926	)
Total shareholders’ deficit:		(4,364	)		(3,924	)
Partners’ capital		1,660			2,599
Total liabilities, shareholders’ deficit & partners’ capital:	$	126,020		$	126,592

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Quarterly Supplemental Disclosure
September 30, 2003

	PRO FORMA CONDENSED		PRO FORMA CONDENSED
	CONSOLIDATED BALANCE		CONSOLIDATED BALANCE
	SHEET		SHEET
	BEFORE ADDITIONAL DEBT PAY DOWN1
	(in thousands)		(in thousands)
	(unaudited)		(unaudited)
	September 30, 2003		September 30, 2003
Assets:
Rental property, net	$	168,773	$	168,773
Cash		63,637		41,237
Escrows & reserves		2,544		2,544
Accounts & other receivables		1,042		1,042
Unbilled rent receivable		1,837		1,837
Deferred costs, net		2,567		2,567
Prepaid expenses & other assets		1,509		1,509
Intangible assets, net		5,584		5,584
Tenant security deposits		807		807
Total assets:	$	248,300	$	225,900
Liabilities:
Accounts payable & accrued expenses	$	2,782	$	2,782
Rents received in advance and security deposits		1,006		1,006
Mortgage loans & other debt		127,660		105,660
Other liabilities		385		385
Total liabilities:		131,833		109,833
Minority Interest		16,183		16,183
Shareholders’ equity:
Common shares, $0.001 par value, 100,000,000 shares authorized:
8,625,000 shares issued & outstanding		9		9
Additional paid-in capital		100,275		99,875
Total shareholders’ equity:		100,284		99,884
Total liabilities and shareholders’ equity:	$	248,300	$	225,900

¹ Reflects Pro Forma Condensed Consolidated Balance Sheet prior to $22.0 million repayment of mortgage debt to GE Capital that the Company anticipates repaying in January 2004, the earliest permissible repayment date.

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Quarterly Supplemental Disclosure
September 30, 2003

		SELECTED OPERATING RATIOS
		(in thousands)
		9 months ended
		September 30, 2003
COVERAGE RATIOS
Interest Coverage Ratio
Pro Forma EBITDA		$	12,075
Divided by Interest Expense			4,966
			2.43	x
Debt Service Coverage Ratio
Pro Forma EBITDA		$	12,075
Divided by Interest Expense			4,966
	+ Principal Amortization		729
			2.12	x
OVERHEAD RATIO
G&A Real Estate Revenues
Pro Forma General and Administrative Expense		$	2,139
Pro Forma Real Estate Revenues			18,901
			11	%
LEVERAGE RATIOS
Debt/Total Market Capitalization
Pro Forma Debt Before Additional Debt Pay down		$	127,660
Pro Forma Total Market Capitalization			289,954
			44	%
Debt/Total Market Capitalization
Pro Forma Debt		$	105,660
Pro Forma Total Market Capitalization			267,954
			39	%

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Quarterly Supplemental Disclosure
September 30, 2003

		PRO FORMA
		TOTAL MARKET CAPITALIZATION
		(in thousands, except per share data)
				Percent of Total
				Market
				Capitalization
Total Common Shares Outstanding			8,634
Common Operating Partnership (“OP”) Units			1,397
Total Common Shares and OP Units			10,031
Market Price at October 31, 2003		$	16.18
Total Equity Capitalization		$	162,294		60.6	%
Pro Forma Debt Capitalization
	Fixed-Rate Debt	$	95,160		35.5	%
	Floating-Rate Debt		10,500		3.9	%
Total Debt Capitalization			105,660		39.4	%
Total Market Capitalization		$	267,954		100.0	%

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Quarterly Supplemental Disclosure
September 30, 2003

DESCRIPTION OF PROPERTIES

		Date of				Square
Property		Acquisition		Property Type	Location	Footage		Occupancy
Plaza 500			1997	Multi-tenant industrial	Alexandria, VA		506,825		95	%
Newington Business Park Center			1999	Multi-tenant industrial	Lorton, VA		254,114		99	%
Snowden Center			2002	Flex	Columbia, MD		140,438		92	%
Crossways Commerce Center I			1999	Multi-tenant industrial	Chesapeake, VA		348,615		100	%
Crossways Commerce Center II			1999	Flex	Chesapeake, VA		147,736		100	%
Rumsey Center			2002	Flex	Columbia, MD		134,654		88	%
Van Buren Business Park			1997	Flex	Herndon, VA		109,255		74	%
Greenbrier Technology Center II			2002	Flex	Chesapeake, VA		79,684		100	%
6600 Business Parkway			1997	Single-tenant industrial	Elkridge, MD		172,200		100	%
Coast Guard Building			1999	Flex	Chesapeake, VA		61,992		100	%
Norfolk Business Center			2002	Flex	Norfolk, VA		89,831		100	%
4200 and 4212 Technology Court			1998	Flex	Chantilly, VA		64,064		100	%
13129 Airpark Road			1997	Multi-tenant industrial	Culpeper, VA		150,400		48	%
	Subtotal/Average						2,259,808		93	%

		Date of				Square
Recent Acquisitions		Acquisition		Property Type	Location	Footage		Occupancy
Virginia Center1			2003	Flex	Glen Allen, VA		119,672		63	%
	Subtotal/Average						2,379,480		91	%

		Purchase				Square
Property under contract		Price		Property Type	Location	Footage		Occupancy
Interstate Plaza 2		$	12,000,000	Single-tenant industrial	Alexandria, VA		107,320		100	%
	Total/Average						2,486,800		92	%

1	Acquired on October 29, 2003.
2	Expected to close in the fourth quarter of 2003.

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Quarterly Supplemental Disclosure
September 30, 2003

PORTFOLIO ANALYSIS

PORTFOLIO BY MARKET
			Number of							Percentage of
			Buildings		Square Feet		Occupancy Rate			Annualized Rent
	Washington			18		1,191,978		89	%		50	%
	Norfolk			6		727,858		100	%		27	%
	Baltimore			9		447,292		94	%		19	%
	Richmond			1		119,672		63	%		4	%
		Total		34		2,486,800		91	%		100	%
PORTFOLIO BY PROPERTY TYPE			Number of							Percentage of
			Buildings		Square Feet		Occupancy Rate			Annualized Rent
	Single-tenant Industrial			2		279,520		100	%		10	%
	Multi-tenant Industrial			11		1,259,954		92	%		41	%
	Flex			21		947,326		89	%		49	%
		Total		34		2,486,800		91	%		100	%
PORTFOLIO BY LEASE TYPE
			Number of Leases		Square Feet		Percentage of Portfolio
	Triple Net			113		1,530,917		67	%
	Industrial Gross			24		368,836		16	%
	Full Service			39		381,890		17	%
		Total		176		2,281,643		100	%

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Quarterly Supplemental Disclosure
September 30, 2003

SUMMARY OF LARGEST TENANTS

									Percentage of		Weighted Average
			Number of		Total Occupied		Total Annualized		Total Annualized		Remaining Lease
Ranking		Tenant	Leases		Square Feet		Rental Revenue1		Rental Revenue		Term
	1	U.S. Government		13		464,018	$	4,418,662	20.7	%		4.1
	2	First Data Corporation		1		117,336		1,150,266	5.4	%		5.1
	3	Carolina Holdings		1		124,501		1,053,665	4.9	%		6.3
	4	REICO Distributors		1		172,200		948,365	4.4	%		6.2
	5	Fibertek, Inc		1		28,719		569,211	2.7	%		2.2
	6	AMSEC LLC		1		35,631		532,602	2.5	%		2.9
	7	Anteon International Corporation		4		104,700		494,519	2.3	%		2.1
	8	Paratek Microwave		1		29,828		391,642	1.8	%		4.0
	9	Precision Partners, Inc		1		47,495		380,581	1.8	%		6.3
	10	Visteon Corporation		2		73,400		321,380	1.5	%		7.8
		Subtotal Top 10 Tenants		26		1,197,828	$	10,260,891	48.0	%		4.7
		All Remaining Tenants		150		1,083,815	$	11,120,532	52.0	%		2.9
		Total / Weighted Average		176		2,281,643	$	21,381,423	100.0	%		3.9

¹ Annualized rental revenue is based on rental revenue as of September 30, 2003.

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Quarterly Supplemental Disclosure
September 30, 2003

LEASE EXPIRATIONS

						Gross Leased Area					Annualized Rental Revenue
				Number of				Percent of					Percent of			Average
				Leases Expiring		Square Footage		Total			Amount		Total			per Sq. Ft.
Year of Lease Expiration
	October – December 2003				5		25,444		1.1	%	$	326,910		1.5	%	$	12.85
			2004		36		345,182		15.1	%		2,882,289		13.5	%		8.35
			2005		37		224,716		9.8	%		2,684,300		12.6	%		11.95
			2006		31		299,734		13.1	%		2,919,958		13.7	%		9.74
			2007		32		450,206		19.7	%		4,558,070		21.3	%		10.12
			2008		16		236,663		10.4	%		2,551,055		11.9	%		10.78
			2009		5		321,681		14.1	%		2,570,129		12.0	%		7.99
		2010 and thereafter			14		378,017		16.6	%		2,888,712		13.5	%		7.64
Total Occupied					176		2,281,643		100.0	%	$	21,381,423		100.0	%	$	9.37

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Quarterly Supplemental Disclosure
September 30, 2003

PRO FORMA DEBT ANALYSIS
(in thousands)

					Principal Balance
					September 30,		Annual Debt				Balance at
Encumbered Properties		Interest Rate			2003		Service		Maturity Date		Maturity
Fixed Rate Debt
Original Portfolio			7.26	%	$	39,403	$	3,429		12/11/2007	$	36,784
	Plaza 500 Van Buren Business Park 6600 Business Parkway 13129 Airpark Road
4200 Tech Court			8.07	%		1,840		168		10/1/2009		1,703
4212 Tech Court			8.53	%		1,783		169		6/1/2010		1,653
Crossways Commerce Center			6.70	%		26,710		2,087		10/1/2012		23,314
Newington Business Park Center			6.70	%		16,849		1,316		10/1/2012		14,706
Interstate Plaza1			7.45	%		8,575		726		1/1/2007		8,237
					$	95,160	$	7,169			$	78,160
Floating Rate Debt
Greenbrier/Norfolk		LIBOR + 2.45%			$	10,500	$	375		11/30/2005	$	10,500
Rumsey/Snowden		LIBOR + 2.57%2				22,000		1,005		12/31/2005		22,000
					$	32,500	$	1,380			$	32,500
Pro Forma Total3					$	127,660	$	9,275			$	118,897

1	Property is under contract. Expected to close in the fourth quarter of 2003.
2	Minimum LIBOR rate of 2.00%.
3	Before repayment of the $22.0 million GE Capital mortgage debt.

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Quarterly Supplemental Disclosure
September 30, 2003

MANAGEMENT STATEMENTS ON NON-GAAP SUPPLEMENTAL MEASURES

Investors in and analysts following the real estate industry utilize funds from operations (“FFO”), net operating income (“NOI”), EBITDA and funds available for distribution (“FAD”), variously defined, as supplemental performance measures.

While the Company believes net income available to common stockholders as defined by GAAP is the most appropriate measure, it considers FFO, NOI, EBITDA, and FAD appropriate supplemental measures given their wide use by and relevance to investors and analysts. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation/amortization of real estate assets. NOI provides a measure of rental operations and does not factor in depreciation/amortization and non-property specific expenses such as general and administrative expenses. EBITDA provides a further tool to evaluate the ability to incur and service debt and to fund dividends and other cash needs. FAD provides a further tool to evaluate the ability to fund dividends. In addition, FFO, NOI, EBITDA, and FAD are commonly used in various ratios, pricing multiples/yields and returns and valuation calculations used to measure financial position, performance and value.

Net Operating Income

Management believes that Net Operating Income (“NOI”) is a useful supplemental measure of the Company’s operating performance. The Company defines NOI as operating revenues (rental income, tenant reimbursements, and other income) less property and related expenses (property expenses, real estate taxes, and insurance). Other real estate investment trust (“REITs”) may use different methodologies for calculating NOI, and accordingly, the Company’s NOI may not be comparable to other REITs.

Because NOI excludes general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property dispositions, discontinued operations, and extraordinary items, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact to operations from trends in occupancy rates, rental rates, and operating costs, providing perspective not immediately apparent from net income. The Company uses NOI to evaluate its operating performance since NOI allows the Company to evaluate the impact that factors such as occupancy levels, lease structure, lease rates, and tenant base have on the Company’s results, margins and returns. In addition, management believes that NOI provides useful information to the investment community about the Company’s financial and operating performance when compared to other REITs since NOI is generally recognized as a standard measure of performance in the real estate industry.

However, NOI should not be viewed as an alternative measure of the Company’s financial performance since it does not reflect general and administrative expenses, interest expense, depreciation and amortization costs, the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company’s properties.

EBITDA

Management believes that EBITDA is a useful supplemental measure of the Company’s operating performance. EBITDA is defined as earnings before interest, taxes, depreciation and amortization.

Management considers EBITDA to be an appropriate supplemental performance measure since it represents earnings prior to the impact of depreciation, amortization and gain (loss) from property dispositions. This calculation facilitates the review of income from operations without considering the effect of non-cash depreciation and amortization or the cost of debt.

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Quarterly Supplemental Disclosure
September 30, 2003

Funds From Operations

Management believes that FFO is a useful supplemental measure of the Company’s operating performance. As defined by the National Association of Real Estate Investment Trusts, or NAREIT, funds from operations (“FFO”) represents net income (loss) before minority interest (computed in accordance with GAAP), including gains (or losses) from debt restructuring and excluding gain on sale of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Other REITs may use different methodologies for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other REITs.

Management considers funds from operations a useful additional measure of performance for an equity REIT because it facilitates an understanding of the operating performance of its properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that funds from operations provides a more meaningful and accurate indication of our performance. In addition, management believes that FFO provides useful information to the investment community about the Company’s financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

However, FFO should not be viewed as an alternative measure of the Company’s operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs that could materially impact the Company’s results of operations.

Funds Available For Distribution

Management believes that Funds Available for Distribution (“FAD”) is a useful measure of the Company’s liquidity. The Company computes FAD by adding to FFO the non-cash amortization of deferred financing costs, and then subtracting tenant improvements, leasing commissions, and recurring capital expenditures, and eliminating the net effect of straight-line rents. FAD provides an additional perspective on the Company’s ability to fund cash needs and make distributions to shareholders by adjusting for the effect of these non-cash items included in FFO, as well as recurring capital expenditures and leasing costs. Management also believes that FAD provides useful information to the investment community about the Company’s financial position as compared to other REITs since FAD is a liquidity measure used by other REITs. However, other REITs may use different methodologies for calculating FAD and, accordingly, the Company’s FAD may not be comparable to other REITs.

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